The Great Credit Card Debate: Miles or Cash Rebate?

For many consumers, choosing a credit card comes down to choosing a future stream of awards. Among these awards, two of the most popular are frequent flyer miles and cash back.

It’s always financially prudent for miles collectors to ask whether there are more lucrative rebates to be had outside the realm of travel rewards. However, it’s even more important now, in light of the significant decline in the value of frequent flyer miles in recent years. All travelers should consider whether it would be a better deal to trade in their airline card for a cash-back card. Or, perhaps, the best move is to carry both.

A range of rebate cards

Among the many credit cards that use cash rebates as their central selling point, the following three represent a sample of the options available to consumers.

First, the Discover More card from Discover is a descendant of one of the original rebate cards. It takes a tiered approach to awards, rebating 0.25 percent on the first $1,500 in yearly charges, 0.50 percent on the second $1,500, and a full one percent on charges exceeding $3,000. Cardholders can also earn a five-percent rebate on purchases of merchandise in select categories, which change quarterly. The Discover card has no annual fee.

For consumers who reach that $3,000 threshold early in the year, or whose purchases happen to fall within the merchandise categories generating the five-percent rebate, the card offers solid value. Otherwise it’s an iffy proposition.

The Citi CashReturns MasterCard from Citibank takes a more straightforward approach, offering five-percent cash back on all purchases for the first three months and a one-percent rebate thereafter. As with the Discover card, there’s no annual fee.

Another variation on the cash rebate theme is the Fidelity Investment Rewards Visa Signature card, issued by FIA Card Services (formerly MBNA). The featured benefit of the card is a 1.5-percent rebate, which is deposited into a customer-designated Fidelity Investments account. For every dollar charged to the card, consumers earn one point. Points in turn can be redeemed in 5,000-point increments, and every 5,000 points generate a $75 deposit into a Fidelity individual, joint, trust, corporate, traditional IRA, Roth IRA, or rollover IRA account.

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The process is manual rather than automatic, so cardholders must monitor their earnings and go online to convert them into dollar deposits when they reach set thresholds. But the payout is generous and there’s no annual fee to hold the card.

The mileage calculation

The value of frequent flyer miles has always been a moving target. Ticket prices rise and fall. Sometimes award seats are readily available; other times, they’re nowhere to be found. Plus, airlines differ in their overall award allocation policies, ranging from moderately generous to downright tight-fisted.

Taking into account the price of paid tickets and the limited availability of award seats, I assess the average value of a frequent flyer mile to be around 1.2 cents. That puts the rebate value of a frequent flyer mile squarely between the payout of the Citibank and Fidelity cards. They all fall within a fairly narrow range between one cent and 1.5 cents on the dollar.

Bear in mind that the valuation of miles does not factor in the value of one’s time—an abundance of which can be spent, sometimes futilely, searching for available award seats. When the hassle factor is included in the calculation, even the less generous rebate cards arguably offer roughly the same value as a mileage card.

What’s in my wallet?

I currently maintain two credit card accounts, one for travel rewards, the other for cash.

The first is a MasterCard linked to my primary airline program. The second, more recently acquired, is the above-mentioned Fidelity Visa card. When I have a trip on my wish list and need miles for a free ticket or an upgrade, I use the airline card to add to my frequent flyer account. Otherwise, the Fidelity card is my card of choice. As much as I covet airline miles in the short run, a solid 1.5-percent rebate invested toward future purchases or retirement seems more and more like the rational move.

If significant numbers of consumers begin scaling back their use of mileage cards in favor of cash rebate cards, as I have done, it could pressure the airlines to adjust the value proposition of their programs. In particular, the airlines would be forced to increase the supply of award seats to regain some of the value recently shed by mileage programs. Come to think of it, that would be yet another benefit of charging my next purchase to a rebate card.